CARES Act and Small Business Paycheck Protection Loans

The “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” (“Act”) was unanimously approved by the United States Senate on March 25, 2020.  On March 27, 2020, the Act was passed by the House of Representatives and signed into law by President Trump. Many small business owners are questioning how the Act will help them remain operational and if they will qualify for relief.  While it is a fluid process, the questions that we are most commonly receiving are addressed below.

What constitutes a small business?

Under the Act, a “small business” is a business that employs less than 500 people.  Small businesses are eligible to receive loans that offer debt forgiveness, which is non-taxable, subject to limitations.  The Act appropriates $349 billion to the Paycheck Protection Program, which aids small businesses in covering payroll (for employees earning up to $100,000 per year) and other expenses from February 15, 2020 through June 30, 2020.

What do Paycheck Protection Loans Cover?

Paycheck Protection Loans may be used to pay payroll, group healthcare benefits, insurance premiums, interest on a mortgage or other debt incurred prior to February 15, 2020, and rent and utility payments. Loan proceeds may not be used to prepay debt. No collateral or personal guaranty is required to obtain Payment Protection Loans.  The maximum repayment term is ten years, with a maximum interest rate of 4%.

How much can I borrow?

Qualifying businesses and non-profit entities are eligible to receive loans up to 2.5 times their monthly payroll costs, measured over the prior twelve months, or $10 million, whichever is smaller. Payroll costs are defined broadly and includes salaries, certain employee benefits, state and local taxes and certain types of compensation to sole proprietors or independent contractors up to $100,000. Seasonal employees are treated differently.

What about loan forgiveness?

Paycheck Protection Loans are eligible for loan forgiveness equal to the amount expended by the borrower during an eight-week period after the origination date of the loan on payroll costs, interest payments on mortgages that commenced prior to February 15, 2020, rent incident to any lease that was in force prior to February 15, 2020, and utilities for which service began before February 15, 2020.

The entire amount of the loan is eligible for forgiveness if the loan proceeds are expended on eligible expenses, except that forgiven amounts will be reduced by the amount of the small business’s employee or salary/wage reductions, which is based on a formula outlined in the Act.

If I already laid off employees, can I rehire them?

Yes, you can. The loan forgiveness reduction may be offset and does not apply if, by June 30, 2020, the borrower of a Paycheck Protection Loan rehires the same number of employees (not necessarily the same employees) who were laid off between February 15, 2020 and 30 days after enactment of the Act.

With regard to salary/wage reductions, the forgiven loan amount will be reduced dollar-for-dollar by the amount of salary or wage reductions in excess of 25% in comparison to the employee’s most recent full quarter. With regard to employee salary/wage reductions, the amount of the loan that may be forgiven will be reduced in proportion to the number of employees that a company lays off. To calculate the proportionate reduction, businesses may compare their reduced workforce numbers to either their average full-time equivalent (“FTE”) employees from February 15, 2019 – June 30, 2019, or their average FTEs from January 1, 2020 – February 29, 2020.

However, the forgiven loan amount reduction applies only to salary/wage reductions for employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of more than $100,000. Salary/wage reductions for employees who earn in excess of $100,000 per year will not impact loan forgiveness eligibility.

An eligible recipient who employees tipped employees (as described in section 3(m)(2)(A) of the Fair Labor Standards Act of 1938 (29 U.S.C. 203(m)(2)(A))) may receive forgiveness for additional wages paid to those employees.

When will I know if a portion of my loan was forgiven and is that income as cancellation of debt?

A lender must issue a decision on a loan application no later than 60 days after the date in which a lender receives an application for loan forgiveness under this section from an eligible recipient. Forgiven amounts may be excluded from gross income.  As such, this cancellation of debt is not income. If you have any questions or concerns, please contact Jarad Stiles at

Jarad Stiles is an attorney in Cooper Levenson’s tax practice and financial restructuring group. He concentrates his practice on business transactions, debt restructuring, bankruptcy, business succession planning, tax planning and controversy matters, asset protection, elder law, trusts, estates, and probate matters in New Jersey and New York.  Jarad may be reached at (856) 857-5594.

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